First we showed you how to formulate a service strategy. Now we're giving you the key benchmarks for measuring your effectiveness. Go grab a chunk of this huge market! In a recent issue of ARN (see article "Building Your Service Business" April 1, 1998, page 43), we discussed the challenges and rewards of migrating from a product-centric to a service-centric business model. In this follow-up article, we'll look in detail at the market, margins, salaries, billing rates, certifications, and other benchmarks for helping you gauge the success of your professional-services pursuit.
First, as added incentive for reading every word of this article, I'll mention that the technology-services market is growing at 16 per cent annually. Forrester Research in the US estimates the worldwide market for technology services will reach $US303 billion by 2002, and certain segments of that market are growing at more than 30 per cent per year.
The very survival of many of high- and middle-market customers now depends on adopting state-of-the-art technology solutions, and their IT budgets reflect that need. It doesn't take a propeller-head to see what's happening in virtually every major industry:
Online transactions in finance and banking firmsGlobal databases in manufacturingE-commerce and extranet deployment in most industriesInternet access for even the smallest companiesMany -- perhaps most -- of these customers also suffer from a shortage of skilled IT personnel required to support their infrastructure, and they must therefore rely on external service providers. Experts agree this shortage will become worse over the next several years.
The result: guaranteed powerful demand for IT consulting, design, implementation, integration, and even full IT outsourcing to external solutions and service providers. Add to that list the high-level management-consulting services provided by larger integrators, and it all adds up to an unprecedented opportunity in service-related business.
Indeed, many integrators report margins of 30 per cent or higher being earned on their technology services. Higher revenues and higher margins -- get 'em while they're hot!
Now that you know IT services will be worth your investment, let's look at ways to achieve a reasonably rapid return.
Optimum -- not maximum -- utilisation
High project margin in itself does not guarantee a profit any more than a 90 per cent product margin will keep you from the red if you cannot sell enough to cover overhead and other com-pany costs. In the service business, the magic word for profit attainment is utilisation.
This describes the percentage of your service people's time that's billed out for a complete year. What counts is your annualised margin, your yearly margin after non-billable hours are factored in.
The trick according to Leo Higley, cofounder of Infoworld Enterprise Solutions, is to keep utilisation at an optimum -- not maximum -- level.
It's virtually impossible to bill out 100 per cent of a person's time, even when they're committed to a long-term project. As a minimum, holiday time and time allocated to training reduce the number of billable hours.
Some integrators try to keep utilisation high by subcontracting a certain percentage of projects. This works best when the subcontractor requires little on-the-job training or when the project is big enough to amortise a small amount of up-front orientation for an experienced worker.
Still, most integrators choose not to go outside for help when they can avoid it, because of the administrative and management costs. You're wise, however, to bring in one or two contract workers on a big project once in a while, just for the management experience.
A theoretical maximum for utilisation is approximately 85 per cent for most integrators, and utilisation below 60 per cent often signals potential problems. Many integrators I work with are able to show a good bottom-line profit from annual service margins of as low as 20 per cent.
The most successful companies I've seen in the service business generate service margins over 30 per cent.
Whatever your margin target, the moral here is to spend at least as much time on improving utilisation as you do on setting hourly prices and hourly compensation.
The price of salaries
Speaking of compensation -- coincidentally our next key benchmark -- credentials have a big effect on salaries and, consequently, billing rates (not to mention relationships with your vendors and customers).
IT-service professionals are commanding an immediate increase of up to $US10,000 upon earning certain certifications.
But you, too, can increase your billable- hour rate up to 50 per cent by having the right certifications.
But as many integrators know, systems engineer salaries can vary depending on customer demand for certain skill sets and experience.
For example, I know SAP engineers who earn more than $US100,000 annually, while entry-level Novell systems engineers in some markets make $US40,000 or less per year.
Like any other resource, what you're compelled to pay for an IT-services worker is driven by supply and demand. If you need a senior person skilled in HP-UX, Oracle and networking, be prepared to pay a premium.
Conversely, the shortage of Novell Certified Network Engineers has been abating, and you can hire them at reasonable rates.
Once you know how much your people are costing you, you can move on to the next benchmark: sales.
Selling the invisible
Service, unlike hardware or software, is an intangible product -- you cannot see it, touch it, smell it, or feel it. You cannot demo a service and you cannot show pictures of it. So different selling tactics must be applied from those for selling hardware or software.
Perception is the key word in successfully selling services. The customer's perception of your company's capabilities and the perceived end-result of your efforts are the key factors in winning the business.
Even price takes a back seat to this question from a target prospect: shall I bet my business on your company's service capabilities?
Though you cannot demonstrate your service product, you can influence customer perception by demonstrating your competency.
For better or worse, vendor certifications are a powerful tool for demonstrating comp-etency. Whether it's Hewlett-Packard, Sun Microsystems or Microsoft, being certified in the products from these market leaders means that your people are trained and presumably qualified on strategic products. Stress your company's certifications in your literature and in your sales presentations.
Perhaps the most potent tools for influencing a prospect's perception of your company are referrals and testimonials. Make a focused effort to cultivate and garner a list of high-quality testimonials, and work with your customer base to develop dependable referrals.
If you're new to the IT-services business, you'll have to use your hardware accounts for references -- which begs the eternal question: will selling hardware into an account lead to service opportunities, or will providing services open the door for hardware and software sales?
It works both ways answers Randy Seidl, president of Workgroup Solutions, a $US40 million integrator. When dealing with a new prospect, customer needs determine what we lead with. The important thing is to establish a business relationship that builds trust. Even if all we do is a terrific job of satisfying a customer's hardware needs, that builds trust.
A final point on selling services: your service people can and do influence what you sell. They are spending time with the account, they present an image of your company and they're in the best position to spot opportunities for additional business.
Many integrators provide some incentive for their service people to bring in business, such as bonuses for hours billed. The danger here is that technicians may concentrate more on selling than on properly servicing important accounts, but there are ways to minimise this. In any case, you should cultivate a certain amount of salesmanship among your service people. Don't wait!
One final thought. There is a dark side, of course, to the huge demand for IT services: the increased competition and inevitable margin erosion as more integrators and other com-panies enter the market, sharpen their ser- vice efficiencies, and price their wares more aggressively.
Service-margin erosion will likely occur much more gradually than product-margin erosion, and it will start with lower-end desktop technologies, but it will happen. That is why you must begin setting competitive benchmarks today for your own service business.
Yes, vendor certification is costly. Many integrators spend well over $US5000 per billable employee per year for training. Keeping your certified workers is even harder. Likewise, valuing services is more complicated and takes more work than simply raising your prices for resold hardware. Packaging your service products in the most attractive way will take time, careful thought and some discovery.
To be sure, the service business presents its own unique set of challenges. But when your company can no longer survive on the margins offered by resold products, when the marketplace is calling for one-stop solutions integrators, and when you're looking for new sources of value-added revenue, it's obvious that the future of the IT business is service.
How to set your service prices
Whether you're billing by the hour or by the project, the trick is to be sure you make a profit on every billable-hour worker.
The first step in calculating billing is to figure out how much each worker is costing you per billable hour. For example, say a worker's fully-loaded annual compensation is $84,000 and you expect to bill out 1200 hours of her time for a fiscal year. Then the cost per billable hour for that worker is $70 (ie $84,000/1200).
The amount you'd bill for this worker is determined by the minimum contribution needed. Billing this worker out at $100 an hour, for instance, gives you a 30 per cent margin.
Fixed, hourly, or a mix?
The next thing to figure out is whether to bill your services by the hour or by the project. Integrators today use one of three common pricing techniques:l Fixed price. This type of pricing is becoming more popular with established service providers. l Customers benefit from the fixed-price model because they can set a fixed budget. Also, there's a strong incentive for the service provider to finish a fixed-price project on time or sooner.l Hourly billing. Many integrators still use hourly billing for indistinct jobs, such as putting a programmer onsite for an app development project of undetermined length. Some integrators continue to use hourly billing to minimise the risk of project overruns, and because they believe they can be more price-competitive with hourly billing.l Fixed price plus cost. This offers a compromise between hourly billing and fixed-price projects. A fixed price is quoted, and if there's an overrun, the service provider does the extra work at cost. This pricing tactic can also include incentives for finishing ahead of schedule. Here again, the service provider has strong motivation to finish the project quickly but has some protection when there's an overrun.
As you gain experience in the service business, you'll determine which approach is best for your company.
The right people, the right tools
This young integration company is laying the groundwork for service prosperity.
When Steve Von Berg and Cheryl Suffoletto founded Synergy in the US in 1995, it wasn't the first time this duo had worked together. They had connected 13 years before at Hewlett-Packard, working as a sales and systems-engineer team responsible for working with business prospects that required large-scale, data-centre expertise.
"The success we experienced while at HP gave our customers the confidence to continue our relationships as we went on our own," explained Von Berg.
"At the outset, Synergy made the decision to focus on Unix- and NT-based solutions and services, and the company has stuck to its knitting. We've remained focused on our core competencies, and it has paid off in loyal customers and key strategic relationships," reported Suffoletto.
The company's commitment to a service-centric strategy was demonstrated with the first eight hires-all engineers. "It's vitally important to hire qualified employees," Suffoletto said. "Our combined staff represents decades of experience and proven competence."
The founders take pride in the fact that nine of their current staff members are former HP employees.
Good recruiting, of course, is only half the battle. The other half is retention. To this end, Synergy invests heavily in training and certification for each worker, said Von Berg. "We foster an atmosphere of trust and mutual respect, and we insist on a commitment to excellence," he said.
As you might expect, however, it's Suffoletto and Von Berg's goal to steadily grow the service component of their business as a percentage of overall revenue. To achieve this, the duo has established certain benchmarks for themselves and their employees:l Set the proper expectations with customers. It's better to underpromise and overdeliver.l Hire the right people and give them the right tools.l Focus on core competencies. Taking on projects outside your selected expertise is not only nonproductive, it can cost you future business.